Key indices including the Nifty 500, Nifty 50, Nifty Smallcap 100 and Nifty Midcap 100 have seen increased volatility and drawdowns from their peaks.
A slowdown in earnings growth has been the key driver of this downturn. Of the companies that have reported results so far this year, many have recorded negative earnings growth.
Combined with rich valuations and persistent inflationary pressures that have affected consumer spending, the market correction seems justified and long overdue. Certain sectors lagged in the recent bull run, with some giving back gains in the correction. Savvy investors see these corrections as opportunities to reassess out-of-favour sectors.
In this article we highlight the five worst-performing sectors of 2024, analyse the reasons behind their struggles, and explore whether there is potential for a turnaround in 2025.
#1 FMCG
The worst-performing sector in 2024 was fast-moving consumer goods (FMCG), with a one-year return of 7.5%. The Nifty FMCG index, which peaked at 66,305, is now quoting at below 56,000.
Nifty FMCG Index
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The biggest companies in this sector are Hindustan Unilever, Nestle, Godrej Consumer Products, Britannia Industries, Dabur and Marico.
Here’s a summary of what various companies are saying about their past performance, and the outlook for the sector.
FMCG companies are facing a difficult environment with high food inflation, muted demand and a heavy monsoon affecting rural markets.
Firms such as Varun Beverages, Britannia, and HUL have seen a slowdown in urban consumption, while rural growth remains positive, according to HUL.
Despite declining wages and unemployment, rural markets are showing resilience and have outpaced urban growth for the past three quarters, as noted by Dabur.
Companies are reporting a mixed performance across segments. Varun Beverages saw growth in carbonated soft drinks, juice and packaged drinking water. Conversely, HUL faced challenges in personal wash and foods & refreshments.
Rising input costs, especially of raw materials, have affected margins, causing companies such as Britannia and HUL to raise prices.
There has been significant growth in e-commerce and quick commerce, and the shift to new channels is putting pressure on traditional trade partners, prompting the likes of Dabur to make inventory corrections to address profitability issues.
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Most companies are cautiously optimistic about the future, anticipating a recovery due to stabilising commodity prices, improved rural demand, and festive season sales.
Companies such as Emami and HUL are focusing on volume-led growth by expanding distribution, investing in key brands, and increasing market share.
Despite urban slowdowns, premiumisation remains strong, with companies such as Britannia and HUL noting consumers’ willingness to pay more for higher-quality products.
As new channels emerge, FMCG players are adjusting their strategies to effectively utilise both traditional and modern trade while addressing challenges faced by general trade partners.
Management commentary and results show that the sector is adapting to a complex landscape.
Historically, buying FMCG stocks during economic slowdowns has proven beneficial. With the right strategies in place, the sector is likely to rebound significantly once temporary issues are resolved.
#2 Oil & gas
The Indian oil & gas sector is vast, and includes a variety of companies. Upstream companies such as ONGC and Oil India focus on finding and extracting crude oil and natural gas, and their profits depend heavily on global oil prices.
Midstream companies such as GAIL and Petronet LNG handle the transport and storage of oil and gas. They earn stable revenue because they sign long-term contracts.
Downstream companies such as IOC, BPCL and HPCL refine crude oil into products such as petrol and diesel and sell them. Their earnings depend on the “crack spread” (the difference between the cost of crude oil and the price of refined products).
Integrated companies such as Reliance Industries operate in all these areas, which helps them balance risks and ensure steady profits.
City gas distribution companies such as Mahanagar Gas (MGL) and Indraprastha Gas (IGL) distribute piped natural gas (PNG) to households and businesses and compressed natural gas (CNG) to vehicles, benefiting from increasing demand for cleaner energy.
Service companies such as Aban Offshore and Deep Industries provide equipment and services to support exploration and production.
Here’s the performance of the oil & gas index over the past year.
S&P BSE Oil & Gas Index
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To understand where the sector is headed, we need to understand the current trends.
Refining margins have been under pressure in recent quarters owing to factors such as lower cracks and falling international crude and product prices. This volatility in refining margins is likely to persist in the near term.
Companies are investing in expanding refining capacity and upgrading facilities to enhance efficiency and profitability. Examples include HPCL’s Visakh refinery expansion and BPCL’s Bina petrochemical expansion.
While petrochemical margins are currently subdued, there are expectations of a recovery in the medium to long term. Growth in demand for petrochemicals is projected to be driven by factors such as increasing consumption in emerging markets.
Demand for natural gas in India is robust, particularly from city gas distribution and gas-based power generation, creating a positive outlook for gas distributors.
Numaligarh Refinery’s expansion from three million to nine million tons will increase demand for oil and gas, which could potentially benefit companies such as Oil India.
The commissioning of pipelines such as the Indradhanush Gas Grid (IGGL) and the DNPL will further unlock gas demand and production potential by connecting to high-demand areas and new customer segments.
However, limited pipeline infrastructure currently constrains production and profitability for some gas distributors.
Gas distributors are also facing challenges from the government’s reduction in administered pricing mechanism (APM) for gas allocations to the city gas distribution sector, impacting profitability.
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Companies such as GAIL are exploring sourcing options such as LNG and CBG to mitigate the impact of reduced APM allocations and ensure profitability.
Volatility in global LNG prices and crude oil prices directly impacts gas sourcing costs and profitability for distributors.
Companies strive to secure long-term gas contracts at favourable prices to mitigate price volatility and maintain profitability.
Gas distribution companies such as GAIL are aiming for better marketing margins. Factors such as the spread between crude-linked LNG and Henry Hub LNG influence marketing margins and profitability.
Companies such as IGL are focusing on operational efficiency, including optimising pipeline capacity utilisation and expanding CNG station networks to improve profitability.
The emergence of electric vehicles (EVs) presents a potential threat to the long-term growth prospects of CNG and the profitability of gas distributors, especially in metropolitan areas.
Overall, despite the weak performance of the sector, companies in this space are continuing to expand and improve their operations, particularly city gas distribution companies, which seem to be part of the long-term shift towards clean energy.
The sector could do well if global geopolitical tensions ease and crude prices remain stable.
#3 Food, beverages & tobacco
Increased costs of raw materials such as wheat, sugar, edible oil and packaging due to inflation and supply-chain disruptions have squeezed profit margins for the sector.
Stringent regulations on tobacco and alcoholic beverages, including higher taxes and restrictions on ads, have hampered growth.
Reduced discretionary spending owing to economic slowdowns and higher inflation has hurt demand for premium products such as branded snacks, alcoholic beverages, and restaurant services.
Intense competition, especially in the quick-service restaurant (QSR) and packaged food segments, has put pressure on market share and pricing power.
As inflation moderates and disposable incomes improve, demand for food and beverage products, especially discretionary items, is expected to rebound.
Consumers increasingly prefer premium and healthy options, providing opportunities for companies to diversify their product portfolios and improve margins.
Barring recent declines in same-store sales growth, urbanisation and changing lifestyles continue to drive the expansion of quick-service restaurants.
The long-term trend of people eating out more often is a consistent secular change that’s favourable for QSR stocks. Rising global demand for Indian food products, spices and tobacco presents a strong opportunity for export-focused companies.
While the sector faces short-term challenges, the long-term outlook is positive, driven by demographic trends and evolving consumer preferences.
#4 Chemicals & petrochemicals
The chemical sector was the darling of markets in 2021 and 2022. However, after excessive euphoria, the sector started facing headwinds and stocks started correcting.
Right now, the industry is facing significant margin pressure due to increased competition, especially from China, where new capacities have come up in recent years. This particularly affects the agrochem sector, which has also seen challenges with inventory correction, pricing pressure and weather patterns impacting demand.
Certain segments, such as energy applications, are experiencing volatility linked to external factors like refinery market dynamics.
Global economic conditions, geopolitical events and supply chain disruptions are creating uncertainty and impacting demand and pricing in various segments.
Despite challenges, India presents a robust market with growing domestic demand for chemicals. This is driven by factors such as rising consumption levels and government initiatives supporting infrastructure development.
Large foreign companies are seeking to diversify their geographical presence and reduce reliance on specific markets. India is emerging as a preferred destination for sourcing chemicals, which may benefit Indian companies.
There is considerable potential in emerging sectors such as battery chemicals and recycling.
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Chemicalcompanies are actively pursuing cost optimisation measures and improving operating leverage to mitigate margin pressures and enhance profitability.
Capacity expansion in various segments is expected to drive volume growth and improve margins over the next few years.
Companies are investing heavily in R&D and technology to develop new chemistries, products, and asset-light growth models to capture emerging opportunities.
While companies are committed to growth, capital expenditure plans are being optimised and moderated to ensure financial prudence and healthy balance sheets.
#5 Cement and construction
The cement industry is experiencing a slowdown due to reduced capital expenditure, particularly in infrastructure projects. Government capex has dropped, impacting investments by railways and the National Highways Authority of India (NHAI).
State government capex has also declined, with the slowdown further aggravated by a prolonged and intense monsoon.
However, some companies anticipate demand revival in the second half of the fiscal year, driven by infrastructure projects announced in the union budget, improved rural demand due to a good monsoon and farm prices, and post-Diwali demand.
Industry-wide estimates for all-India cement demand growth for the full year range from 4% to 5%.
Weak demand and pricing pressure are significant headwinds for cement companies. Companies are looking to maintain realisations and market share in this challenging environment.
Some companies have experienced price improvement since September. Price increases are anticipated with improved demand post-Diwali.
Despite the market slowdown, premiumisation remains a key focus area. Companies are seeing a record high share of premium products in the trade segment.
Concreto Uno, a premium cement variant of Nuvoco Vistas, is gaining traction in the east. Premiumisation strategies contribute to better realizations and Ebitda margins.
Facing weak demand and pricing pressure, companies are concentrating on operational efficiency.
Efforts to reduce power and fuel costs are yielding positive results. Companies are implementing strategies to optimize energy costs further, including increasing waste heat recovery capacity.
Cost savings are expected in the coming years from renewable energy, coal blocks, and logistical improvements.
Consolidation is taking place in the cement sector through mergers and acquisitions. This trend is expected to increase the market share of the top cement companies.
While the near-term outlook is cautious due to market dynamics, many expect a demand recovery in the second half of FY25.
This is dependent on the execution of infrastructure projects announced in the union budget, which remains a key monitorable. Improved rural demand and the festive season are also expected to contribute to the recovery.
Mirroring the cement industry slowdown, several construction companies have experienced muted order inflow and execution challenges. This is particularly pronounced in infrastructure projects, and is attributed to reduced government spending.
For instance, IRB Infrastructure Developers notes delays in toll-operate-transfer (TOT) and build-operate-transfer (BOT) projects, with expectations of bidding activity resuming by December. Some companies have also mentioned project delays caused by the monsoon season and political issues.
Despite the slowdown, construction companies maintain a healthy order book, providing revenue visibility for the next few quarters.
For example, IRB Infrastructure Developers has an order book of about ₹7,000 crore executable over six quarters. However, revenue growth projections for the full year are cautious.
Project delays owing to factors such as land acquisition, approvals and utility shifting are contributing to execution challenges. Construction companies are focusing on mitigating these issues and optimising project execution.
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Labour shortages are also a concern, particularly in specialised areas, but companies are addressing these through various initiatives.
Amid this slowdown, some construction companies are shifting focus to the private sector. NBCC (India) aims to secure orders from projects related to housing, land monetisation, and redevelopment.
Companies are also exploring diversification opportunities. HG Infra Engineering is venturing into the water sector, pursuing projects such as treatment plants and hybrid annuity model (HAM) projects. ITD Cementation is also looking at expanding into transmission and distribution engineering, procurement, and construction (EPC) projects.
As in the cement industry, construction companies anticipate a demand recovery in the second half of FY25. This is contingent on the timely execution of government-announced infrastructure projects and increased private-sector investments.
While companies aim to maintain profitability, margin pressures may persist in the near term due to competitive intensity and potential cost fluctuations.
However, efficient execution, cost optimisation strategies, and a focus on higher-margin projects could contribute to margin improvement in the medium to long term.
Conclusion
Each of these sectors has faced unique challenges, ranging from inflationary pressures and regulatory hurdles to margin compression and reduced government spending.
Despite these headwinds, there are green shoots of recovery in the form of evolving consumer preferences, infrastructure initiatives, and strategic shifts within companies.
As we approach 2025, there is a potential for a turnaround driven by stabilising commodity prices, recovering demand, and growth in sectors such as clean energy and urbanisation.
Long-term investors may find value in these underperforming areas as previous downturns have often presented attractive entry points.
Happy investing!
Disclaimer: This article is for education purposes only. It is not a recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
